Test bank with answers for auditing and assurance services 14e by alvin a arens and randal j elder chapter 7

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Auditing and Assurance Services, 14e (Arens)
Chapter 7 Audit Evidence
Learning Objective 7-1
1) There are no questions for this Learning Objective.
Answer:

Learning Objective 7-2
1) Auditors must make decisions regarding what evidence to gather and how much to accumulate.
Which of the following is a decision that must be made by auditors related to evidence?
A)
Sample size
Timing of audit procedures
Yes
Yes
B)
Sample size
No

Timing of audit procedures

No

Sample size
Yes

Timing of audit procedures
No

Sample size
No

Timing of audit procedures
Yes

C)

D)

Answer: C
Te rms: Decision to be made by auditors re late d to e vide nce
Diff: Easy
Objective : LO 7-2
AACSB: Re flective thinking skills

1
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2) Audit procedures are concerned with the nature, extent, and timing in gathering audit evidence.
Which, of the following, is true as to the timing of audit procedures?
A)
Prior to the fiscal year-end of Subsequent to the fiscal year-end
the client
of the client
Yes
Yes
B)
Prior to the fiscal year-end of Subsequent to the fiscal year-end
the client
of the client
No
No
C)
Prior to the fiscal year-end of Subsequent to the fiscal year-end
the client
of the client
Yes
No

D)
Prior to the fiscal year-end of Subsequent to the fiscal year-end
the client
of the client
No
Yes
Answer: A
Te rms: Timing of audit proce dures
Diff: Easy
Objective : LO 7-2
AACSB: Re flective thinking skills

Learning Objective 7-3
1) Audit evidence has two primary qualities for the auditor; relevance and reliability. Gi ven the choices
below which provides the auditor with the most reliable audit evidence?
A) general ledger account balances
B) confirmation of accounts receivable balance received from a customer
C) internal memo explaining the issuance of a credit memo
D) copy of month-end adjusting entries
Answer: B
Te rms: Audit evide nce qualities of re levance and re liability
Diff: Easy
Objective : LO 7-3
AACSB: Analytic skills

2
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2) Which of the following is not a characteristic of the reliability of evidence?
A) effectiveness of client internal controls
B) education of auditor
C) independence of information provider
D) timeliness
Answer: B
Te rms: Characte ristic of re liability of e vide nc
Diff: Easy
Objective : LO 7-3
AACSB: Re flective thinking skills

3) The auditor must gather sufficient and appropriate evidence during the course of the audit. Sufficient
evidence must:
A) be well documented and cross-referenced in the audit documents.
B) be based on sources that are external to company.
C) provide evidence that prove or disprove an audit objective/assertion.
D) be persuasive enough to enable the auditor to issue an audit report.
Answer: D
Te rms: Sufficie nt e vide nce

Diff: Easy
Objective : LO 7-3
AACSB: Re flective thinking skills

4) Audit evidence obtained directly by the auditor will not be reliable if:
A) the auditor lacks the competence to evaluate the evidence.
B) it is provided by the client's attorney.
C) the client denies its veracity.
D) it is impossible for the auditor to obtain additional corroboratory evidence.
Answer: A
Te rms: Audit evide nce obtaine d directly by auditor
Diff: Easy
Objective : LO 7-3
AACSB: Re flective thinking skills

5) Appropriateness of evidence is a measure of the:
A) quantity of evidence.
B) quality of evidence.
C) sufficiency of evidence.
D) meaning of evidence.
Answer: B
Te rms: Appropriate ness of e vide nce
Diff: Easy
Objective : LO 7-3
AACSB: Re flective thinking skills

3
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6) Which of the following statements regarding the relevance of evidence is correct?
A) To be relevant, evidence must pertain to the audit objective of the evidence.
B) To be relevant, evidence must be persuasive.
C) To be relevant, evidence must relate to multiple audit objectives.
D) To be relevant, evidence must be derived from a system including effective internal controls.
Answer: A
Te rms: Re levance of evide nce
Diff: Easy
Objective : LO 7-3
AACSB: Re flective thinking skills

7) Two determinants of the persuasiveness of evidence are:
A) competence and sufficiency.
B) relevance and reliability.
C) appropriateness and sufficiency.
D) independence and effectiveness.
Answer: C
Te rms: De terminants of persuasive ness of e vide nce

Diff: Easy
Objective : LO 7-3
AACSB: Re flective thinking skills

8) The two characteristics of the appropriateness of evidence are:
A) relevance and timeliness.
B) relevance and accuracy.
C) relevance and reliability.
D) reliability and accuracy.
Answer: C
Te rms: Appropriate ness of e vide nce
Diff: Easy
Objective : LO 7-3
AACSB: Re flective thinking skills

9) Which of the following forms of evidence would be least persuasive in forming the auditor's opinion
about marketable securities and other investments held by the company?
A) Responses to auditor's questions by the president and controller regarding the investments account.
B) Correspondence with a stockbroker regarding the quantity of client's investments held in street name
by the broker.
C) Minutes of the board of directors authorizing the purchase of stock as an investment.
D) The auditor's count of marketable securities.
Answer: A
Te rms: Least persuasive form of e vide nce
Diff: Mode rate
Objective : LO 7-3
AACSB: Re flective thinking skills

4
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10) Which of the following statements is not correct?
A) It is possible to vary the sample size from one unit to 100% of the items in th e population.
B) The decision of how many items to test should not be influenced by the increased costs of performing
the additional tests.
C) Th e decision of how many items to test must be made by the auditor for each audit procedure.
D) The sample size for any given procedure is likely to vary from audit to audit.
Answer: B
Te rms: Testing of items; Sample size
Diff: Mode rate
Objective : LO 7-3
AACSB: Re flective thinking skills

11) For audit evidence to be compelling to the auditor it must be sufficien t and appropriate. Which
statement below is not correct regarding the appropriateness of audit evidence?
A) The more effective the internal control system, the more assurance it provides the auditor about the
reliability of financial reporting by the client.

B) An auditor's opinion, to be economically useful and profitable to the auditing firm needs to be formed
within a reasonable time and based on evidence obtained that assures profits for the auditing firm.
C) Evidence obtained from independent sources outside the entity is generally more reliable than
evidence secured solely within the entity.
D) The independent auditor's direct personal knowledge, obtained through inquiry, observation and
inspection, is generally more persuasive than information obtained indirectly.
Answer: B
Te rms: Appropriate ness of audit e vide nce
Diff: Mode rate
Objective : LO 7-3
AACSB: Re flective thinking skills

12) Which one of the following is not one of the primary purposes of audit documentation prepared by
the audit team?
A) A basis for planning the audit.
B) A record of the evidence accumulated and the results of the tests.
C) A basis for review by supervisors and partners.
D) A basis for determining work deficiencies by peer review teams.
Answer: D
Te rms: Purposes of audit docume ntation
Diff: Mode rate
Objective : LO 7-3
AACSB: Re flective thinking skills

5
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13) Which of the following is the most objective type of evidence?
A) A letter written by the client's attorney discussing the likely outcome of outstanding lawsuits.
B) The physical count of securities and cash.
C) Inquiries of the credit manager about the collectability of noncurrent accounts receivable.
D) Observation of cobwebs on some inventory bins.
Answer: B
Te rms: Most obje ctive type of evide nce
Diff: Mode rate
Objective : LO 7-3
AACSB: Re flective thinking skills

14) Due professional care, the third general standard, is concerned with what is done by the independent
auditor and how well it is done. For example, due care in the matter of audit documentation requires that
audit documentation of the evidence gathered by the auditor meets which of the following criteria?
A) Workpapers be indexed to the gen eral ledger accounts and include both a permanent file and a
general file.
B) The content be sufficient to provide support for the auditor's opinion, including the auditor's
representation as to compliance with auditing standards.
C) Audit evidence is principally gathered to determine if the client's financial statements, as prepared by
management, can be relied upon to make managerial decisions about the firm.

D) Audit evidence as displayed in the workpapers is primarily performed to protect the auditing firm in
the case of a lawsuit by investors.
Answer: B
Te rms: Audit evide nce gathere d by auditors meets which c rite ria
Diff: Mode rate
Objective : LO 7-3
AACSB: Re flective thinking skills

6
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15) Which items affect the sufficiency of evidence when choosing a sample?
A)
Selecting items with a high
The randomness of the items
likelihood of misstatement
selected

Yes
Yes
B)
Selecting items with a high
likelihood of misstatement
No

The randomness of the items
selected
No

Selecting items with a high
likelihood of misstatement
Yes

The randomness of the items
selected
No

Selecting items with a high
likelihood of misstatement
No

The randomness of the items
selected
Yes

C)

D)

Answer: C
Te rms: Sufficie ncy of evide nce whe n choosing a sample
Diff: Mode rate
Objective : LO 7-3
AACSB: Re flective thinking skills

16) Determine which of the following is most corr ect regarding the reliability of audit evidence.
A) Information that is indirectly obtained from external sources is the most reliable audit evidence.
B) Reliability of audit evidence is dependent upon the evidence being convincing.
C) Reliability of evidence refers to the amount of evidence obtained.
D) An effective internal control system provides more reliable audit evidence.
Answer: D
Te rms: Re liability of audit e vide nce
Diff: Mode rate
Objective : LO 7-3
AACSB: Re flective thinking skills

17) Evidence is generally considered appropriate when:
A) it has been obtained by random selection.
B) there is enough of it to afford a reasonable basis for an opinion on financial statements.
C) it has the qualities of being relevant, objective, and free from know n bias.
D) it consists of written statements made by managers of the enterprise under audit.
Answer: C
Te rms: Evide nce conside re d appropriate
Diff: Mode rate
Objective : LO 7-3
AACSB: Re flective thinking skills

7

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18) Given the economic and time constraints in which auditors can collect evidence about management
assertions about the financial statements, the auditor normally gathers evidence that is:
A) irrefutable.
B) conclusive.
C) persuasive.
D) completely convincing.
Answer: C
Te rms: Auditor normally gathe rs evide nce that is
Diff: Mode rate
Objective : LO 7-3
AACSB: Re flective thinking skills

19) Which of the following statements is not a correct use of the terminology in relation to audit
evidence?
A) Evidence obtained from an independent source outside the client organization is more reliable than

that obtained from within.
B) Documentary evidence is more reliable when it is received by the auditor indirectly rather than
directly.
C) Documents that originate outside the company are considered more reliable than those that originate
within the client's organization.
D) External evidence, such as communications from banks, is generally regarded as more reliable than
answers obtained from inquiries of the client.
Answer: B
Te rms: Terminology re late d to audit evide nce
Diff: Challe nging
Objective : LO 7-3
AACSB: Re flective thinking skills

20) Evidence is usually more persuasive for balance sheet accounts when it is obtained:
A) as close to the balance sheet date as possible.
B) only from transactions occurring on the balance sheet date.
C) from various times throughout the client's year.
D) from the time period when transactions in that account were most numerous during the fiscal period.
Answer: A
Te rms: Evide nce is more persuasive for balance shee t accounts
Diff: Challe nging
Objective : LO 7-3
AACSB: Re flective thinking skills

21) Which of the following statements is true?
A) A large sample of highly competent evidence is persuasive if it is relevant to the objective being tested.
B) A large sample of evidence that is neither competent nor timely is not persuasive.
C) A small sample of only one or two pieces of relevant, competent, and timely evidence lacks
persuasiveness.
D) The persuasiveness of evidence can be evaluated after considering its sufficiency.

Answer: A
Te rms: Samples and e vide nce
Diff: Challe nging
Objective : LO 7-3
AACSB: Re flective thinking skills

8
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22) Which of the following statements relating to the competence of evidential matter is always true?
A) Evidence from outside an enterprise is always reliable.
B) Accounting data developed under satisfactory conditions of internal control are more relevant than
data developed under unsatisfactory internal control conditions.
C) Oral representations made by management are not reliable evidence.
D) Evidence must be both reliable and relevant to be considered appropriate.
Answer: D
Te rms: Compe te nce of e vide ntial matter

Diff: Challe nging
Objective : LO 7-3
AACSB: Re flective thinking skills

23) Distinguish between internal documentation and external documentation as types of audit evidence.
Give two examples of each. Which type is considered more reliable?
Answer: Internal documentation involves the auditor's examination of documents that have been
prepared and used within the client's organization and are retained without ever going to an outside
party. Examples would include duplicate sales invoices, employees' time reports, and inventory receiving
reports.
External documentation involves the auditor's examination of documents that have been in the hands of
someone outside the client's organization. Examples include vendors' invoices, cancelled checks,
cancelled notes payable, and insurance policies.
External documents are regarded as more reliable evidence than internal documents.
Te rms: Inte rnal and e xternal documentation; Re liability of e vide nce
Diff: Mode rate
Objective : LO 7-3
AACSB: Re flective thinking skills

9
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24) Discuss three of the following influences on the persuasiveness of evidence.
1. Relevance
2. Independence of provider
3. Effectiveness of client's internal controls
4. Auditor's direct knowledge
5. Degree of objectivity
6. Timeliness
Answer:
1. Relevance — Evidence must pertain to the audit objective if it is to be persuasive. Relevance must be
considered in terms of specific audit objectives as evidence may be relevant to one objective and not
another.
2. Independence of provider — Evidence obtained from a source outside the entity is more reliable and
persuasive than that obtained from within.
3. Effectiveness of client's internal controls — When a client's internal controls are effective, evidence
obtained is more reliable than when they are weak.
4. Auditor's direct knowledge — Evidence obtained directly by the auditor through physical
examination, observation, computation and inspection is more competent than information obtained
indirectly.
5. Degree of objectivity — Objective evidence is more reliable than evidence that requires considerable
judgment to determine whether it is correct.
6. Timeliness — The timeliness of audit evidence can refer either to when it is accumulated or to the
period covered by the audit. Evidence is usually more reliable for balance sheet accounts when it is
obtained as close to the balance sheet date as possible.
Te rms: Influe nces pe rsuasive ness of evide nce
Diff: Mode rate

Objective : LO 7-3
AACSB: Re flective thinking skills

25) Why is the appropriateness of audit evidence obtained by the auditor important in forming an audit
opinion? Describe the qualities information should have to be considered appropriate by the auditor.
Answer: Appropriateness is a measure of the quality of evidence. Audit evidence that is considered
appropriate contains the characteristics of relevance and reliability. Relevant evidence related to the
assertion being tested. Reliability refers to the relative "truthfulness" of the assertion/objective.
Te rms: Appropriate ness of audit e vide nce
Diff: Mode rate
Objective : LO 7-3
AACSB: Re flective thinking skills

10
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26) The reliability of evidence refers to the degree to which evidence is considered believable or

trustworthy. There are six factors that affect the reliability of audit evidence. On e factor is the
independence of the provider; i.e., evidence obtained from a source outside the client company is more
reliable than that obtained within. Identify and discuss any two of the remaining five factors:
Answer: The remaining four factors that affect the reliability of evidence are:
• Effectiveness of client's internal control. When a client's internal controls are effective, evidence obtained
from the client is more reliable than when controls are weak.
• Auditor's direct knowledge. Evidence obtained directly by the auditor is more reliable than information
obtained indirectly.
• Qualif ications of indiv iduals providing the information. In formation obtained from persons not familiar
with the business world would generally not be considered as reliable as information from an expert in a
business-related field.
• Degree of objectivity. Objective evidence is more reliable than evidence that requires considerable
judgment to determine whether it is correct.
• Timel iness — The timeliness of audit evidence can refer either to when it is accumulated or to the
period covered by the audit. Evidence is usually more reliable for balance sheet accounts when it is
obtained as close to the balance sheet date as possible.
Te rms: Re liability of e vide nce
Diff: Challe nging
Objective : LO 7-3
AACSB: Re flective thinking skills

27) Below are 10 documents typically examined during an audit. Classify each document as either
internal or external.
Type of Document
Documents
1. Canceled checks for payments of accounts payable.
2. Payroll time cards.
3. Duplicate sales invoices.
4. Vendors' invoices.
5. Bank statements.

6. Minutes of the board of directors' meetings.
7. Signed lease agreements.
8. Notes receivable.
9. Subsidiary accounts receivable records.
10. Remittance advices.
Answer:
1. External
2. Internal
3. Internal
4. External
5. External

6.
7.
8.
9.
10.

Internal
External
External
Internal
External

Te rms: Inte rnal and e xternal e vide nce
Diff: Mode rate
Objective : LO 7-3
AACSB: Analytic skills

11

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28) Audit evidence to support an opinion about the fairness of a client's financial statements con sists
entirely of written information.
A) True
B) False
Answer: B
Te rms: Audit evide nce to support an opinion
Diff: Easy
Objective : LO 7-3
AACSB: Re flective thinking skills

29) The relevance of audit evidence depends on the audit objective being test ed.
A) True
B) False
Answer: A
Te rms: Re levance of audit evide nce

Diff: Easy
Objective : LO 7-3
AACSB: Re flective thinking skills

30) Inquiries of the client are usually sufficient to provide appropriate evidence to satisfy an audit
objective.
A) True
B) False
Answer: B
Te rms: Inquiries of clie nt; Appropriate evide nce
Diff: Easy
Objective : LO 7-3
AACSB: Re flective thinking skills

31) A canceled check written by the client, made payable to a local supplier and drawn on the client's
bank account is one type of internal document.
A) True
B) False
Answer: B
Te rms: Inte rnal document
Diff: Easy
Objective : LO 7-3
AACSB: Re flective thinking skills

32) Objective evidence is more reliable, and hence more persuasive, than subjective evidence.
A) True
B) False
Answer: A
Te rms: Obje ctive e vide nce more re liable
Diff: Mode rate

Objective : LO 7-3
AACSB: Re flective thinking skills

12
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33) Relevance of evidence can only be considered in terms of specific audit objectives.
A) True
B) False
Answer: A
Te rms: Re levance of evide nce
Diff: Mode rate
Objective : LO 7-3
AACSB: Re flective thinking skills

Learning Objective 7-4
1) Calculating the gross margin for the current year under audit as a percent of sales and comparing it

with previous years is what type of evidence?
A) physical examination
B) analytical procedures
C) observation
D) inquiry
Answer: B
Te rms: Calculate and compare gross margin
Diff: Easy
Objective : LO 7-4
AACSB: Re flective thinking skills

2) When the auditor develops supporting evidence for amounts posted to account balances with
documentary evidence, that process is called:
A) inquiry.
B) confirmation.
C) vouching.
D) physical examination.
Answer: C
Te rms: Auditor de ve lops supporting e vide nce for amounts poste d with docume ntary evide nce
Diff: Easy
Objective : LO 7-4
AACSB: Re flective thinking skills

3) An example of an external document that provides reliable information for the auditor is:
A) employees' time reports.
B) bank statements.
C) purchase order for company purchases.
D) carbon copies of checks.
Answer: B
Te rms: External docume nt

Diff: Easy
Objective : LO 7-4
AACSB: Re flective thinking skills

13
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4) An example of a document the auditor receives from the client, but which was prepared by someone
outside the client's organization, is a:
A) con firmation.
B) sales invoice.
C) vendor invoice.
D) bank reconciliation.
Answer: C
Te rms: Example of document auditor re ce ives from clie nt but pre pare d by outside source
Diff: Easy
Objective : LO 7-4

AACSB: Re flective thinking skills

5) "The use of comparisons and relationships to assess whether account balances or other data appear
reasonable compared to the auditor's expectations" is a definition of:
A) analytical procedures.
B) tests of transactions.
C) tests of balances.
D) auditing.
Answer: A
Te rms: Use of comparisons and re lationships to assess whe the r account balances
Diff: Easy
Objective : LO 7-4
AACSB: Re flective thinking skills

14
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6) Often, auditor procedures result in significant differences being discovered by the auditor . The auditor
should investigate further if:
A)
Significant differences are not
Significant differences are
expected but do exist
expected but do not exist
Yes
Yes
B)
Significant differences are not
expected but do exist
No

Significant differences are
expected but do not exist
No

C)
Significant differences are not
expected but do exist
Yes

Significant differences are
expected but do not exist
No

D)
Significant differences are not
expected but do exist

No

Significant differences are
expected but do not exist
Yes

Answer: A
Te rms: Audit proce dures result in significant diffe re nces
Diff: Easy
Objective : LO 7-4
AACSB: Re flective thinking skills

7) When the auditor uses tracing as an audit procedure for tests of transactions she is primarily c oncerned
with which audit objective?
A) Occurrence
B) Completeness
C) Cutoff
D) Classification
Answer: A
Te rms: Tracing as an audit proce dure conce rne d with audit objective
Diff: Mode rate
Objective : LO 7-4
AACSB: Re flective thinking skills

15
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8) When the auditor used the audit procedure vouching she is primarily concerned with which of the
following audit objectives when testing classes of transactions?
A) Occurrence
B) Completeness
C) Authorization
D) Classification
Answer: B
Te rms: Vouching as an audit proce dure conce rne d with audit objective
Diff: Mode rate
Objective : LO 7-4
AACSB: Re flective thinking skills

9) When auditors use documentation to support recorded transactions and amounts, the process is
usually called:
A) tracing.
B) confirmations.
C) vouching.
D) reperformance.
Answer: C
Te rms: Directional testing

Diff: Mode rate
Objective : LO 7-4
AACSB: Re flective thinking skills

10) Analytical procedures must be used during which phase(s) of the audit?
A)
Test of Controls
Planning
Completion
Yes
Yes
Yes
B)
Test of Controls
No

Planning
Yes

Completion
Yes

C)
Test of Controls
Yes

Planning
No

Completion

No

D)
Test of Controls
No

Planning
No

Completion
No

Answer: B
Te rms: Analytical proce dures use during phases of the audit
Diff: Mode rate
Objective : LO 7-4
AACSB: Analytic skills

16
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11) Auditors may decide to replace tests of details with analytical procedures when possible because the:
A) analytical procedures are more reliable.
B) analytical procedures are considerably less expensive.
C) analytical procedures are more persuasive.
D) tests of details are more difficult to interpret.
Answer: B
Te rms: Tests of de tails of balances; Substantive analytical proce dures
Diff: Mode rate
Objective : LO 7-4
AACSB: Re flective thinking skills

12) When making decisions about evidence for a given audit, the auditor's goal is to obtain a sufficient
amount of timely, reliable evidence that is relevant to the information being verified. In addition, the goal
of audit efficiency is to gather and evaluate the information:
A) no matter the cost involved in obtaining such evidence.
B) even if cost is irrelevant to the auditor, because they bill the client for costs incurred.
C) at the lowest possible total cost.
D) at the cost suggested in the engagement letter.
Answer: C
Te rms: Goal of audit e fficie ncy
Diff: Mode rate
Objective : LO 7-4
AACSB: Re flective thinking skills

13) "Physical examination" is the inspection or count by the auditor of items such as:
A) cash, inventory, and payroll timecards.

B) cash, inventory, canceled checks, and sales documents.
C) cash, inventory, canceled checks, and tangible fixed assets.
D) cash, inventory, securities, notes receivable, and tangible fixed assets.
Answer: D
Te rms: Physical e xamination
Diff: Mode rate
Objective : LO 7-4
AACSB: Re flective thinking skills

14) Which of the following statements is most correct regarding the primary purpose of audit
procedures?
A) to detect all errors or fraudulent activities as well as illegal activities
B) to comply with auditing standards promulgated by the PCAOB for publicly held clients
C) to gather corroborative audit evidence about management's assertions regarding the client's financial
statements
D) to determine the amount of errors in the balance sheet accounts in order to adjust the accounts to
actual
Answer: C
Te rms: Primary purpose of audit proce dures
Diff: Mode rate
Objective : LO 7-4
AACSB: Re flective thinking skills

17
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15) Given the audit procedures below, which one provides the most reliable evidence?
A) Confirmations
B) Recalculation
C) Reperformance
D) Observations
Answer: A
Te rms: Audit proce dure that provides most re liable evide nce
Diff: Mode rate
Objective : LO 7-4
AACSB: Re flective thinking skills

16) Confirmations would almost always be used, assuming all the accounts below are material, for:
A) individual transactions between organizations, such as sales transactions.
B) bank balances and accounts receivable.
C) fixed asset additions.
D) payroll expenses.
Answer: B
Te rms: Confirmations
Diff: Mode rate
Objective : LO 7-4
AACSB: Re flective thinking skills

17) To be considered reliable evidence, confirmations must be controlled by:
A) a client employee responsible for accounts receivable.
B) a financial statement auditor.
C) a client's internal audit department.
D) a client's controller or CFO.
Answer: B
Te rms: Confirmations controlle d to be conside re d re liable e vide nce
Diff: Mode rate
Objective : LO 7-4
AACSB: Re flective thinking skills

18
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18) Indicate whether confirmation of accounts receivable and accounts payable, provided they each are
significant accounts, is required or optional:

A)
Accounts Receivable
Accounts Payable
Required
Required
B)
Accounts Receivable
Required

Accounts Payable
Optional

Accounts Receivable
Optional

Accounts Payable
Required

Accounts Receivable
Optional

Accounts Payable
Optional

C)

D)

Answer: B
Te rms: Confirmation of accounts rece ivable and accounts payable

Diff: Mode rate
Objective : LO 7-4
AACSB: Re flective thinking skills

19) The Auditing Standards Board has concluded that analytical procedures are so important that they
are required during:
A) planning and test of control phases.
B) planning and completion phases.
C) test of control and completion phases.
D) planning, test of control, and completion phases.
Answer: B
Te rms: Analytical proce dures require d
Diff: Mode rate
Objective : LO 7-4
AACSB: Re flective thinking skills

20) A benefit obtained from comparing the client's data with industry averages is that it provides a(n):
A) benchmark to compare the company against industry averages.
B) indication where errors exist in the statements.
C) benchmark to be used in evaluating a client's budgets.
D) comparison of "what is" with "what should be."
Answer: A
Te rms: Comparing clie nt data with industry ave rages
Diff: Mode rate
Objective : LO 7-4
AACSB: Re flective thinking skills

19
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21) The primary purpose of performing analytical procedures in the planning phase of an audit is to:
A) help the auditor obtain an understanding of the client's industr y and business.
B) assess the going concern assumption.
C) indicate possible misstatements.
D) reduce detailed tests.
Answer: A
Te rms: Primary purpose of analytical proce dures in planning phase of audit
Diff: Mode rate
Objective : LO 7-4
AACSB: Re flective thinking skills

22) Which of the following is not a correct combination of terms and related type of audit evidence?
A) Inquire inquiries of client
B) Count physical examination
C) Recompute documentation
D) Read documentation
Answer: C

Te rms: Combination of terms and re late d audit e vide nce
Diff: Mode rate
Objective : LO 7-4
AACSB: Re flective thinking skills

23) Which of the following is not one of the major types of analytical procedures?
A) compare client with industry averages
B) compare client with prior year
C) compare client with budget
D) compare client with SEC averages
Answer: D
Te rms: Major type of analytical proce dures
Diff: Mode rate
Objective : LO 7-4
AACSB: Re flective thinking skills

24) An important benefit of industry comparisons is as:
A) an aid to understanding the client's business.
B) an indicator of errors.
C) an indicator of fraud.
D) a least-cost indicator for audit procedures.
Answer: A
Te rms: Be nefit of industry comparisons
Diff: Mode rate
Objective : LO 7-4
AACSB: Re flective thinking skills

20
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25) The auditor is concerned that a client is failing to bill customers for shipments. An audit procedure
that would gather relevant evidence would be to:
A) select a sample of duplicate sales invoices and trace each to related shipping documents.
B) trace a sample of shipping documents to related duplicate sales invoices.
C) trace a sample of Sales Journal entries to the Accounts Receivable subsidiary ledger.
D) compare the total of the Schedule of Accounts Receivable with t he balance of the Accounts Receivable
account in the general ledger.
Answer: B
Te rms: Audit proce dure to gather re le vant evide nce that clie nt fails to bill
Diff: Challe nging
Objective : LO 7-4
AACSB: Analytic skills

26) In performing your audit for a privately-held firm your inquiries have yielded that one of the
company's owner's primary motivations is to pay the least amount of income tax that is possible. Based
on this observation which audit objective for ending inventory would the auditor be most concerned
about ascertaining?

A) Completeness
B) Accuracy
C) Rights and obligations
D) Existence
Answer: A
Te rms: Audit objective for e nding inve ntory
Diff: Challe nging
Objective : LO 7-4
AACSB: Analytic skills

27) Which of the following statements is not correct?
A) Analytical procedures are used to isolate accounts or transactions that should be investigated more
extensively.
B) For certain immaterial accounts, analytical procedures may be the only evidence needed.
C) In some instances, other types of evidence may be reduced when analytical procedures indicate that an
account balance appears reasonable.
D) Analytical procedures use supporting documentation to determine which account balances need
additional detailed procedures.
Answer: D
Te rms: Analytical proce dures
Diff: Challe nging
Objective : LO 7-4
AACSB: Re flective thinking skills

21
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28) You are auditing the company's purchasing process for goods and services. You are primarily
concerned with the company not recording all purchase transactions. Which audit procedure below
would be the most effective audit procedure in this case?
A) Vouching from the accounts payable account to the vendor invoices.
B) Tracing vendor invoices to recorded amounts in the accounts payable account.
C) Confirmation accounts payable recorded amounts.
D) Reconciling the accounts payable subsidiary ledger to the accounts payable account.
Answer: B
Te rms: Audit proce dure for recording all purchase transactions
Diff: Challe nging
Objective : LO 7-4
AACSB: Analytic skills

29) Which of the following discoveries through the use of analytical procedures would most likely
indicate a relatively high risk of financial failure?
A) A decline in gross margin percentages.
B) An increase in the balance in fixed assets.
C) An increase in the ratio of allowance for uncollectible accounts to gross accounts receivable, while at
the same time accounts receivable turnover also decreased.
D) A higher than normal ratio of long-term debt to net worth as well as a lower than average ratio of

profits to total assets.
Answer: D
Te rms: Analytical proce dures
Diff: Challe nging
Objective : LO 7-4
AACSB: Analytic skills

22
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30) Which of the following statements is correct regarding the costs involved in obtaining evidence?
A)
Physical examination is usually the
Cost of obtaining evidence may be a
least expensive type of audit
factor in deciding whether to
evidence

obtain that evidence
Yes
Yes
B)
Physical examination is usually the
least expensive type of audit
evidence
No

Cost of obtaining evidence may be a
factor in deciding whether to
obtain that evidence
No

Physical examination is usually the
least expensive type of audit
evidence
Yes

Cost of obtaining evidence may be a
factor in deciding whether to
obtain that evidence
No

Physical examination is usually the
least expensive type of audit
evidence
No

Cost of obtaining evidence may be a

factor in deciding whether to
obtain that evidence
Yes

C)

D)

Answer: D
Te rms: Costs in obtaining evide nce
Diff: Challe nging
Objective : LO 7-4
AACSB: Re flective thinking skills

31) An analytical procedure used to test the reasonableness of an account balance occurs when the
auditor calculates the expected balance and compares it with the actual balance. The auditor's expected
account balance may be determined by:
A) using industry standards.
B) using Dun and Bradstreet reports.
C) relating it to another account that involves financial statement articulation.
D) inquiry of the client.
Answer: C
Te rms: Analytical proce dure use d to test reasonable ness of an account balance
Diff: Challe nging
Objective : LO 7-4
AACSB: Re flective thinking skills

23
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32) One purpose of performing analytical procedures in the planning phase of an audit is to assess the
client's financial condition. Explain how t he assessment of a client's financial condition can affect the
auditor's decisions concerning evidence accumulation in later phases of the audit.
Answer: The use of analytical procedures is often a useful indicator for determining whether the client
company has financial problems and if substantial doubt exists about the entity's ability to continue as a
going concern. The analytical procedures could also indicate the presence of possible misstatements in
the financial statements if significant unexpected fluctuations occur. These items may warrant increased
audit procedures, whereas when the analytical procedures reveal no unusual fluctuations, the possibility
of material misstatement is minimized and it is possible, thus, to perform fewer detailed tests on related
accounts or to eliminate certain audit procedures, reduce sample sizes, or to move the procedures farther
away from the balance sheet date.
Te rms: Analytical proce dures
Diff: Mode rate
Objective : LO 7-4
AACSB: Re flective thinking skills

33) There are four important purposes of analytical procedures. Identify three of these four purposes and,

for each purpose, give a specific example of an analytical procedure that an auditor might perform.
Answer: Four important purposes of analytical procedures are:
• To help the auditor understand the client's industry and business, the auditor might analyze recent
trends in the client's gross margin percentages to assess the effects of competition in the industry.
• To aid in the assessment of the client's ability to continue as a going concern, the auditor might
analyze several of the client's key ratios including the ratio of long-term debt to net worth, the ratio of
profits to total assets, and the current ratio.
• To indicate the presence of possible misstatements in the financial statements, the auditor might
compare the current year's unaudited account balances with the previous year's audited balances.
• To reduce the extent of detailed tests, the auditor might perform a simple analytical procedure suc h
as multiplying the client's monthly rent times 12 as a test of the client's rent expense account. If the
product agrees with the balance in rent expense, no additional testing of the account may be necessary.
Te rms: Purposes of analytical proce dures
Diff: Challe nging
Objective : LO 7-4
AACSB: Re flective thinking skills

24
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34) Define the following terms commonly used in audit procedures:
1. Examine
2. Scan
3. Compute
4. Foot
5. Compare
6. Count
7. Vouch
Answer:
1. Examine — A reasonably detailed study of a specific document or record to determine specific facts
about it. It is the inspection or count by the auditor of a tangible asset.
2. Scan — A less detailed examination of a document or record to determine whether there is something
unusual warranting further investigation.
3. Compute — A calculation done by the auditor independent of the client.
4. Foot — Addition of a column of numbers to determine whether the total is the same as the client's.
5. Compare — A comparison of information in two different locations.
6. Count — A determination of assets on hand at a given time. This is associated with evidence defined
as physical examination.
7. Vouch — The use of documents to verify recorded transactions or amounts.
Te rms: Audit evide nce and audit proce dures
Diff: Mode rate
Objective : LO 7-4
AACSB: Re flective thinking skills

25
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